IRS Rules Gift Splitting Differs for Gift and GST Tax Purposes

In PLR 201811002 the IRS has ruled that gift splitting works differently when applied to Gift taxes and Generation Skipping Transfer (GST) taxes. Gift splitting is authorized by IRC Section 2513(a)(1) and states, generally, that, if elected, a gift made by one spouse to a person other than that donor’s spouse is considered, for gift tax purposes, as made one-half by the donor and one-half by the donor’s spouse. Many people may encounter gift splitting in the context of annual exclusion gifts. For example, assume Husband gifts $30,000 to Child in 2018. On her 2018 Form 709, Wife consents to have gifts made by Husband treated as having been made one-half by Husband and one-half by Wife for gift tax purposes. Consequently, Husband is treated as having made a gift to Child of $15,000 and Wife is treated as having made a gift to Child of $15,000; thus, each remains within the annual gift tax exclusion for 2018.

The facts of PLR 201811002 state that, in Year 1, Husband formed and funded four (4) irrevocable trusts for the benefit of each of his four Children. Child was to receive all the trust income for life and, upon Child’s death, Grandchild was to receive the trust principal at the age of thirty-five (35) years. Husband and Wife each filed a Form 709 for Year 1 in which Wife consented to having gifts made by Husband treated as having been made one-half by Husband and one-half by Wife. However, for undisclosed reasons, Husband was allocated three-fourths (3/4) of the total value transferred in Year 1, and Wife was allocated one-fourth (1/4) of the total value transferred in Year 1 for gift tax purposes. No GST tax allocation was made on such Forms 709.

Sometime after the expiration of the time period within which gift tax may be assessed by reason of the transfer, it became apparent that no GST allocation had been made on the Form 709 which had been filed for such transfer, and Husband was advised to make a late GST allocation. A second Form 709 was prepared for Year 2 which, erroneously, reported Husband as transferor of one hundred percent (100%) of the total value transferred in Year 1. A late allocation of Husband’s GST exemption was made, and Husband claimed the trusts had an inclusion ratio of zero (0) as a result.

The IRS ruled that since the time period within which gift tax may be assessed under Code Section 6501 had expired, the amount of the taxable gift is the amount that is finally determined for gift tax purposes, and such amount may not thereafter be adjusted. Essentially, the value of Husband’s taxable gift for gift tax purposes will equal three-fourths (3/4) of the total value transferred and cannot be adjusted. However, the IRS further ruled that the GST regulations state that Husband is treated as transferor of one-half (1/2) the total value transferred for GST tax purposes, despite the allocation of three-fourths (3/4) of the total value transferred to Husband for gift tax purposes. Effectively, the IRS has ruled that the gift splitting rules are applied differently for gift tax and GST tax purposes. Practically, this means that since Husband’s GST exemption is allocated only to one-half (1/2) the total value transferred to the trusts, the trusts will not be considered entirely GST exempt and may be subject to GST tax in the future.

This PLR is a reminder that gift tax returns are an important part of estate planning, not only for gift tax purposes, but also for GST tax purposes. Any such return must be carefully and completely prepared to avoid unintended future tax consequences.